Recent bank failures were caused by various obstacles that affected their functioning.
Several regulatory measures were taken against Silvergate owing to its ties with the FTX exchange, its founder Sam Bankman-Fried, and its sister business Alameda Research. It also identified the gloomy market in 2022 as one of the factors that contributed to its insolvency.
In contrast, Silicon Valley Bank fell owing to many operational losses and other issues. Signature Bank encountered obstacles it could not overcome, resulting in governmental involvement.
In addition to these three banks, more than 186 institutions in the United States are already poised to fail, according to experts.
According to a recent assessment, up to 190 banks in the United States are already on the verge of failure. 10% of US banks presently have more unrecognized losses than the collapsed Silicon Valley Bank, experts determined after analyzing the SVB. In addition, they revealed that SVB’s capitalization exceeds 10% of current banks.
Nonetheless, SVB retained a more significant proportion of uninsured financing since just 1% of banks had greater leverage than SVB. Hence, the losses and uninsured leverage were sufficient to induce a run by uninsured depositors, which dragged SVB down.
According to the experts, if other institutions confront a similar scenario in which half of their uninsured depositors decide to withdraw, approximately $300 billion in insured deposits would be in danger. In addition, if the withdrawals of uninsured depositors result in modest fire sales, several U.S. institutions will be at risk.
After the increase in interest rates, the economists reported that they examined the asset exposure of U.S. banks. They sought to determine how the Federal Reserve’s actions influence the industry’s financial stability.
Sadly, the investigation indicated that the industry’s market value is $2 trillion less than the book value of assets comprising loan portfolios carried to maturity. It also showed that the marked-to-market assets of all U.S. banks decreased by 10%.
In conclusion, the economists claimed that the decreases in the prices of bank assets exposed them to the possibility of bankruptcy if all uninsured depositors elected to withdraw their funds simultaneously. Significantly, depositors without insurance often lose more than their counterparts when banks collapse. So, any suggestion of a banking crisis sends them into a panic to avert losses.
Even if the situation seems terrible for the US banking industry, the action of the central bank and the assurance of US Vice President Joe Biden demonstrate the government’s willingness to help the sector. In addition, a recent study revealed that leading American financial corporations raised $30 billion to assist a bankrupt US bank.
Also Read: Former New York Regulator Said The Closure Of Signature Bank Was Not Due To Cryptocurrency
Wallets